The government’s decision of Tuesday, May 15, to reduce labour taxes from year 2013 with a gradual decrease in the personal income tax and a corresponding law, is an important step towards improvement of the Latvian business competitiveness, Daniels Pavluts, the Economy Minister, said.
However, with a growing economical activity and state budget income, we should use the first opportunity, carefully assessing fiscal effects and risks, to reduce labour tax burden much faster. It is also important to develop clearly foreseeable rules for all parties involved, for example, in relation to municipal budget income, the Economy Minister said.
“The current plan and changes in tax legislation provide to reduce the personal income tax from 25% to 24% in 2013. In Lithuania this rate is 15%, but in Estonia – 21%. Lower labour taxes are important not only for Latvia’s competitiveness, in comparison to our neighbouring countries, but also for advancement of economical activity, establishment of new and better paid jobs, investments in development and efficiency. A bigger decrease in the personal income tax rate would be a stronger signal to companies working in the shadow economy. These considerations should be the main leading-motives thinking about future changes in the fiscal policy,” Pavluts emphasized.
The fact that the reduction of labour taxes is a very important step for employers is proved also by a survey of nearly 50 companies carried out by the Economy Ministry. More than a half of these companies said there should be much faster decrease in the personal income tax (at least by 2 per cent from 2013), but the untaxed minimum and deductions for dependent persons should be gradually increased.
83% employers said the reduction of labour taxes will allow to increase net wages to employees, 21% – it will improve work efficiency, 46% – it will increase motivation of employees to stay in Latvia. At the same time such a measure would let employers create new jobs (35%), increase amount of investments (23%), raise profit (23%), as well as compete more successfully with other Baltic states (48%). Only 10% of respondents said the tax reduction would not change their business.
According to Pavluts, in the time when employers are trying to overcome consequences of the crisis, make investments and think about new investments in the development, the government’s task is to support these activities with available instruments. One of the main characteristics of the investments and business environment is the fiscal policy which should support development and be foreseeable in a longer term.